Oil Service Holders Living On The Edge

06/10/04 08:59:25 AM

by Kevin Hopson

The Oil Service Holders has been clinging to near-term support but will this price level hold?

Security: OIH
Position: N/A

I touched on the Oil Service Holders (OIH), an exchange-traded fund for oil service companies, several months ago. At that time, I mentioned how the fund had broken out of a five-month trading range, which indicated much higher prices in the short-term and predicted an upside target of between $68.00 and $75.00. I calculated this price target by taking the number of times that prices tested the upper channel line before breaking out (2), multiplying this by the width of the trading range ($61.00 - $54.00 = $7.00) and then adding this figure ($7.00 x 2 = $14.00) to the bottom ($54.00 + $14.00 = $68.00) and top ($61.00 + $14.00 = $75.00) channel lines.

As you can see in the one-year chart, the OIH topped out around the $75.00 level in early March, as the upper end of the price target had predicted. Since then, prices have been moving lower within the green pitchfork. Though the fund proceeded to find a short-term bottom last month, the technicals continue to be weak. For example, notice how prices failed to test the median line (middle line) of the black pitchfork before testing the bottom parallel line. This is known as the "price failure" rule and usually results in a break of the bottom parallel line.

Graphic provided by: Stockcharts.com.

However, to give prices the benefit of the doubt, a sliding parallel line is drawn from the low (below the bottom black parallel line). As you can see, the fund has continued to find support along this uptrend line (red line) since mid-May. If prices eventually breach support here ($65.00), a sell signal will be given and a further move down to the 200-day moving average ($63.81) will likely ensue.

Even if prices can hold support at the $65.00 level, the fund faces significant resistance in the $68.00 to $68.50 range. This is the site of May's recovery high, the fund's 50-day moving average ($68.18), the 38.2 percent retracement level from the March-May decline and the top green parallel line. As a result, I would keep a close eye on the $65.00 and $68.50 levels in the near-term. A move below $65.00 would likely indicate further weakness, while a move above $68.50 would turn the short-term technicals bullish.

Kevin Hopson

Kevin has been a technical analyst for roughly 10 years now. Previously, Kevin owned his own business and acted as a registered investment advisor, specializing in energy. He was also a freelance oil analyst for Orient Trading Co., a commodity futures trading firm in Japan. Kevin is currently a freelance writer.